And that, according to Jason Henderson, vice president of the Federal Reserve Bank of Kansas City, has caused a shift in ag loan demand.

Testifying last week before the Ag House Subcommittee on Department Operations, Oversight and Credit, Henderson said crop producers are leading the charge in the changing ag finance marketplace. Livestock producers, while still able to maintain some level of profitability even in the face of high feed costs, haven’t been able to take advantage of the flush of capital their crop-producing brethren have.

"With strong cash flows at the end of 2010, farmers, especially crop producers, paid off operating loans," Henderson says. In fact, loan volumes fell more than 22% below levels in the first quarter of 2011, he said.

"In contrast, commercial banks expanded lending to livestock producers. With higher costs for feed and feeder cattle straining livestock profits, loan demand from livestock enterprises increased. Even in the face of tighter credit standards and rising delinquency rates, commercial banks expanded loan volumes for livestock approximately 15% last year," he says. "In the first quarter of 2011, commercial bank lending for livestock held near last year’s elevated levels."

Going forward, Henderson says ag lenders appear to be in a position to meet the credit needs of their borrowers. "With healthier loan portfolios, ag banks are enjoying stronger earnings than their banking peers, which should further underpin future lending activity." In fact, he told the subcommittee, in a year (2010) when more than 150 commercial banks failed, fewer than 10 were agricultural banks.

Still, questions persist. "The most pressing concerns and stringent requirements have likely emerged for livestock producers struggling with profitability and for smaller farm operations owned by young and beginning farmers with less equity," he says.

And he cautions that ag bankers, just like their customers, know agriculture is a cyclical business. "For example, according to USDA’s long-term projections, average annual corn prices could fall to $4.10/bu. by 2013 and remain less than $4.25/bu. through 2020." Should that happen, profit margins in crop production would decline significantly and cropland values could fall as much as a third, he predicts, eroding the financial health of the farm sector.

"In the face of volatile markets and uncertain profits, low leverage ratios and larger levels of working capital are often the best risk management strategies," he says. "Most measures of financial leverage remain at historical lows, but it’s still an open question whether farmers have learned these lessons from past farm crises and will resist the temptation of borrowing at low interest rates."